This Growth Stock Has Market-Beating Potential

Investors can achieve life-changing returns from buying the right growth stock and holding on for decades. These businesses are few and far between but typically come in fast-growing industries, have high-profit margins, and (at least in the 21st century) utilize the internet to its full potential. One company that fits this bill is Match Group (NASDAQ:MTCH), a conglomerate of dating apps that spun off from InterActiveCorp (NASDAQ:IAC) last summer.

Here’s why Match Group stock has market-beating potential.

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Tinder’s dominance

Currently, the majority of Match Group’s business comes from Tinder. Tinder is well known as a dating and relationship app targeting younger people. When Tinder first started, its users engaged with the app for free. However, over the past few years, Match Group has rapidly increased the number of paying subscribers on Tinder. Last quarter, it had 9.6 million payers (Match Group’s definition for the number of people who pay for Tinder’s products), up 17% from the year-ago period.

Looking back a few years, this is a remarkable amount of growth for Tinder’s paying customer base. In 2015 the application only had 376 thousand paying subscribers (a somewhat different term from “payers”) and only 3.7 million in the second quarter of 2018. With less than 10 million people paying money for Tinder products compared to hundreds of millions of downloads around the world, there’s no reason to think Match Group won’t continue growing the number of Tinder payers over the next three to five years.

Last quarter, Tinder did $399 million in direct revenue, up from $276 million in the same period two years ago even with pandemic/lockdown-induced headwinds. If Tinder can double the number of its paying users, there’s a chance the app could do $1 billion in quarterly revenue sometime within the next five years.

Rise of the rest

Until lately, the big growth story from Match Group had really been just Tinder. But over the next five years, its fastest-growing businesses will likely be from its other portfolio of apps.

First, we should highlight the resurgence of legacy services like Match.com and OkCupid, which actually grew sales in Q2 to $192 million. These legacy businesses won’t grow much for Match Group, but they can be consistent cash cows.

The exciting assets are in what Match Group calls its Emerging Brands, which include the fast-growing, relationship-focused app called Hinge. Hinge is on track to do $200 million in revenue this year. It grew revenue 150% in Q2. Management says the app is on pace to more than double revenue in 2021. This growth should only continue through 2022, which is when management says it plans to push Hinge internationally. Match Group’s demographic/niche-dating apps like BLK, Chispa, and Upward continue to climb the app store’s top-grossing rankings. This group is only on track to contribute $50 million in revenue this year vs. Match Group’s consolidated guidance of $3 billion, so they don’t matter much to the business right now. But over the longterm, if they continue to pick up traction, shareholders will certainly benefit.

Reasonable valuation

With a market cap of $40 billion, Match Group looks expensive relative to the $3 billion in revenue it is expected to do this year. However, given the asset-light nature of dating apps, Match Group has super-high profit margins, even as it invests to grow the business. Management is guiding for north of $1 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) this year, which is a good proxy for cash flow for this business. That gives the stock a forward price-to-EBITDA ratio of around 40, which is not much higher than the market average.

If Match Group can continue growing revenue at a 20% clip over the next three to five years, this valuation will come down rapidly. Plus, investors shouldn’t forget the benefit Match Group will get if Apple and Google’s app-store fees get legislated away. In testimony to lawmakers, a Match Group executive admitted the company paid the app stores somewhere around 20% of its annual revenue. If those app-store fees for developers go down, that will be a direct benefit to Match Group’s profit margins.

Match Group is in a fast-growing industry and has impressive profit margins, and the stock trades at a reasonable valuation. This is a recipe for market-beating potential over the long haul.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium advisory service. Were motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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